FEDERAL BUDGET 2017

Issue 428, April 2017

On March 22, 2017, Finance Minister Bill Morneau presented the second Budget of the Liberal government. The 2017 Budget proposed a wide variety of tax and other financial measures; however, the tax items were generally narrower changes than in 2016. We will be providing more detailed analysis on many issues in future issues, as they develop; however, a brief summary of some items of note follows:

PERSONAL INCOME TAX
Budget 2017 proposes several changes to personal tax matters, including:

  • adding nurse practitioners to the list of medical practitioners that could certify eligibility for the disability tax credit;
costs incurred as far back as 2007 
  • clarifying that medical intervention required in order to conceive a child be eligible as a medical expense on the same basis as costs incurred on account of medical infertility. This measure will allow claims for refunds in respect of such expenses for any of the immediately preceding ten taxation years;
  • consolidating the existing caregiver credit, infirm dependant credit, and family caregiver tax credit with a new Canada caregiver credit. The amounts for this new credit will generally mirror the amounts that could have been claimed under the current caregiver credit or infirm dependent credit (both $6,883 in 2017), and family caregiver tax credit ($2,150 in 2017). It will be phased out where the dependant’s net income exceeds $16,163 (in 2017). While most claims will be unchanged or increase, this new credit will no longer allow claims in respect of non-infirm seniors who reside with their adult children;
  • allowing ecological gifts to be made to municipal and public bodies performing a function of government (such as First Nations), but no longer permitting such gifts to private foundations;

some tax expenditures to be eliminated 

  • eliminating the public transit tax credit for public transit passes and electronic fare cards attributable to public transit use that occurs after June 2017;
  • removing the tax-free status of non-accountable allowances paid to various elected officials, including members of provincial and territorial legislative assemblies, officers of municipalities, officers of municipal utilities boards, commissions, corporations or similar bodies, and members of public or separate school boards. The exception for allowances fixed in an Act of Parliament (Clause 6(1)(b)(i)(A)) remains; however, payment of tax-free allowances to Members of Parliament ended over ten years ago;
  • eliminating the home relocation loans deduction;
  • confirming the first-time donor’s super credit will be allowed to expire for years after 2017; and
  • extending certain anti-avoidance rules currently applicable to TFSAs, RRSPs and RRIFs to also apply to RESPs and RDSPs. These rules do not affect ordinary portfolio investments.
     

BUSINESS INCOME TAX

Professionals’ Work in Progress Exclusion
Currently, taxpayers in certain designated professions (i.e., accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors) may elect to exclude the value of work in progress (WIP) in computing their income (Section 34).

Budget 2017 indicates that this enables these taxpayers to defer tax by permitting the costs associated with WIP to be expensed without the matching inclusion of the associated revenues. It, therefore, proposes to eliminate this election.

budgeting for increased tax liability during phase-in period

For the first taxation year that begins on or after Budget Day, 50% of the lesser of the cost and the fair market value of WIP will be included in income. In subsequent taxation years, the lesser of the cost and the fair market value of WIP will be taken into income. So, for a professional with a December year-end, 100% of WIP can be excluded for the fiscal year ending December 31, 2017, but 50% of WIP will be required to be included in the year ending December 31, 2018, and the full lower of cost and FMV of WIP will be included for years ending December 31, 2019 and subsequent.

how to determine the cost of WIP

Editor’s Comment
At present, many professionals either do not account for WIP in their financial accounts or account for WIP at its expected billing amount, using staff and partner billing rates rather than cost. These professionals will be required to determine the cost of their WIP in order to comply with these new provisions. As well, some uncertainty has been expressed regarding how the cost of WIP is properly calculated.

For an additional commentary on this topic, see our video commentary at https://vimeo.com/210792535:

Cash Purchase Tickets
On a similar “elimination of deferrals” theme, Budget 2017 notes that farmers delivering listed grain (i.e., wheat, oats, barley, rye, flaxseed, rapeseed or canola) to the operator of a licensed elevator may choose to receive a cash purchase ticket (or certain other prescribed forms of settlement). This can be payable in the following taxation year, in which case the farmer defers reporting the income to the following year.

suggesting grain farmers make a submission

Budget 2017 announced a consultation to assess the ongoing utility, and potential elimination, of this tax deferral, including possible transitional rules. Comments should be sent to consultation_tax_2017@canada.ca by May 24, 2017.

Other Business Income Tax Matters
Budget 2017 proposes several other changes to some other business tax items, including:

  • facilitating mergers of segregated funds and conversion of switch mutual fund corporations into mutual fund trusts;
  • permitting an elective mark-to-market regime for derivatives held on income account, and introducing a specific anti-avoidance rule to address straddle transactions;
  • expanding the list of eligible geothermal equipment qualifying for enhanced CCA (Classes 43.1 and 43.2);
  • tightening the rules for Canadian exploration expenses (CEE), including changing many costs related to discovery wells to Canadian development expenses (CDE), and ending the ability of eligible small oil and gas corporations to treat up to $1 million of CDE as CEE for flow-through share agreements;
  • eliminating the investment tax credit for creation of new child care spaces; and

more uncertainty on de facto control 

  • overriding the Federal Court of Appeal decision in McGillivray Restaurant Ltd. (discussed in VTN 418(9)) to provide that factors relevant in determining the existence of de facto control are not restricted to those that include “a legally enforceable right and ability to effect a change to the board of directors or its powers, or to exercise influence over the shareholder or shareholders who have that right and ability”.

Private Corporations: Things to Come
Although no changes were proposed, Budget 2017 indicated that the review of federal tax expenditures highlighted a number of issues regarding tax planning strategies using private corporations, specifically:

  • Sprinkling income using private corporations, to family members who are subject to lower personal tax rates.
  • Using business income sheltered by lower corporate tax rates to accumulate a passive investment portfolio.
  • Converting dividends into capital gains, resulting in a significantly lower tax rate.

foreshadowing of Budget 2018?

Budget 2017 indicates a review of tax planning strategies that inappropriately reduce personal taxes of high-income earners is in progress. The review will also consider whether there are current income tax provisions that have an inappropriate, adverse impact on genuine business transactions involving family members. A paper setting out the nature of these issues in more detail, as well as proposed policy responses, is expected in the coming months.

capital gains inclusion rate still 50%

Also, in a March 23, 2017 Globe and Mail article (Bill Morneau says government not planning to raise rate on capital gains), the Minister of Finance was cited as having expressed concern with continued speculation the Government would raise the capital gains inclusion rate and was quoted as saying “Those were not in our budget and those are not key areas of focus.” Rather, upcoming plans for tax changes will be focused on measures to curb the ability of individuals to create corporate structures that are not active businesses but rather a vehicle for paying less tax.

GST/HST AND EXCISE TAX
Budget 2017 also proposes a number of GST/HST and excise changes, including:

GST/HST clarified for Uber drivers

  • changing the definition of a taxi business to include all persons engaged in a business of transporting passengers for fares by motor vehicle within a municipality and its environs where the transportation is arranged for or coordinated through an electronic platform or system, such as a mobile application or website. This will end the uncertainty over whether drivers for Uber and other ride sharing services are taxi businesses, effective July 1, 2017;
  • repealing the rebate available to non-residents for the GST/HST that is payable in respect of the accommodation portion of eligible tour packages;
  • eliminating the tobacco manufacturers’ surtax, with an offsetting increase to excise duty rates, with the increased tax on inventory at the end of Budget Day to be remitted by May 31, 2017; and
  • raising the excise duty rates on alcohol products by 2%, and indexing these for inflation in the future.
     

OTHER MATTERS

Employment Insurance (EI) Changes
Budget 2017 proposes a new caregiving benefit which will provide eligible caregivers up to 15 weeks of EI benefits while they are temporarily away from work to support or care for a critically ill or injured family member.

Proposed Workforce Development Agreements will consolidate the existing Canada Job Fund Agreements, the Labour Market Agreements for Persons with Disabilities and the Targeted Initiative for Older Workers, with the objective of broadening worker eligibility for EI-funded skills training and employment supports.

whether related party employment may be insurable, and eligible for these enhanced benefits

More flexible parental benefits will allow parents to choose to receive EI parental benefits over an extended period (up to 18 months) at a lower benefit rate (33% of average weekly earnings). The existing benefit rate (55% over a period of up to 12 months) will remain available for parents who prefer this arrangement. Finally, women will be able to claim EI maternity benefits up to 12 weeks before their due date (expanded from the current standard of 8 weeks).

Adult Education
In order to enhance the ability of adult students to pursue educational updates, Budget 2017 announced numerous measures including expanded eligibility for Canada Student Grants and Canada Student Loans for part-time students, enhancing the ability of EI claimants to pursue self-funded training while maintaining their EI status, and establishing a new organization to support skills development and measurement in Canada.

Canada Savings Bonds (CSBs)
CSBs will be discontinued, with no new bonds issued in 2017. Existing CSBs are unchanged.

Electronic T4 Delivery
Budget 2017 proposes to allow employers to distribute T4 (Statement of Remuneration Paid) information slips electronically. Required privacy safeguards will be specified by the Minister of National Revenue. Paper T4s will continue to be required for some employees.

likely increases to CRA verification activity

More Money for CRA
Budget 2017 directs an additional $523.9 million to CRA over five years to prevent tax evasion and improve tax compliance. The Budget suggests these funds will be directed at activities such as increasing verification activities, hiring additional auditors and specialists with a focus on the underground economy, and developing improved business intelligence infrastructure and risk assessment systems to target high-risk international tax and abusive tax avoidance cases.

The Budget estimates a $5 return in Federal revenues for every dollar invested in targeted compliance interventions, not including related provincial and territorial revenues.

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